Officials: Program threatens Texas police-fire pension fund

Program's cost has grown so fast it is endangering the entire $3.4 billion pension fund

By Steve Thompson
The Dallas Morning News

DALLAS — Dallas police officers and firefighters of retirement age have long enjoyed a popular alternative to leaving the force. They can continue working at full pay while pension benefits they would have collected earn interest in special accounts instead.

The Deferred Retirement Option Plan, known as DROP, has kept experienced cops and firefighters on the job. But the program's cost has grown so fast it is endangering the entire $3.4 billion pension fund.

If the fund runs into financial trouble, Dallas taxpayers will be on the hook, alongside public safety workers. The city contributes more than $100 million a year to the pension fund.

"We need to fix this," pension trustee and City Council member Tennell Atkins said at a pension committee meeting Tuesday. "I want to make sure that everybody understands this is a serious deal."

Pension officials also revealed Tuesday that the fund's real estate and private equity investments have been performing worse than previously thought. Those investments comprise a major part of the fund's value.

Dallas public safety workers can opt to retire or enter the DROP program as early as their 40s, depending on when they were hired and how long they've served. If they enter DROP, it's as if they retired; their retirement benefits stop growing. But they keep working, and the retirement checks they would have started collecting go into their DROP accounts instead.

About a third of the pension fund's 9,300 active and retired members are DROP participants, with accounts averaging more than $400,000 apiece. Two accounts have more than $3 million.

Ten have more than $2 million. And 250 have more than $1 million, according to pension officials.

What's threatening the fund is that it pays members annual interest on the accounts of 8 to 10 percent. The interest costs the fund more than $100 million per year.

The interest the pension fund pays members is far lower than what it has earned recently on its investments. Over the past seven years, it has earned an annual return of only 3.8 percent, according to preliminary figures from its consultant. The median annual return for similar-size public funds during that period was 5.6 percent.

The downturn of 2008 and low interest rates since then have made it difficult for pension funds to earn their assumed investment returns. To meet its obligations to members, the Dallas fund assumes an annual return of 8.5 percent.

The low returns of recent years have had a huge effect on the Dallas DROP program.

The pension fund's cash obligation to the program stands at more than $1.3 billion. That's double what it was just six years ago. And if nothing changes, it will grow to nearly $3 billion over the next decade, according to a presentation pension officials have given members.

Across the country, pension fund officials have watched DROP program losses grow in recent years.

In 2011, Dallas pension fund members voted to change the DROP program's rules, making it much less attractive for new hires. Under the changes, DROP accounts of newly hired officers and firefighters won't earn interest.

As early as 2012, an inner circle of pension board members began to discuss whether further changes would be needed. One trustee, police Officer Thomas White, resigned from the board last year saying that he felt cut out of that inner circle and that the pension fund wasn't facing up to the dangers from DROP.

Members To Vote
This year, pension officials held a series of meetings with police officers and firefighters about the problem. They floated solutions that included lowering DROP account interest rates for current participants and other means of limiting how much members can accumulate.

The pension board will meet again Thursday on DROP. Because the program is part of the pension fund's governing documents, officials plan to ask members to vote on changes later this year.

But agreeing on what changes to make will be tough for police officers and firefighters. Whether workers are early in their careers or late, how high they are on the pay scale and other factors will determine which solutions affect them most.

Several workers spoke passionately at Tuesday's meeting.

DROP has "built up over the years for a certain generation of public safety officers and essentially made them rich," said firefighter Brian Hass angrily.

"I think you're putting it on the backs of the current generation," he said of some of the proposed fixes.

The nation's first DROP program started in Baton Rouge in 1981, according to the Dallas fund's presentation. The idea spread across the country, mostly among funds of public safety workers.

Early Adopter
Dallas was among the idea's early adopters, creating its program in 1993 to keep experienced officers and firefighters on the force. At that time many were retiring in their 40s and beginning second careers as they collected benefits.

In recent years, other funds have made a variety of changes to their DROP programs, from changing interest rates to shutting them down altogether. The Dallas fund's DROP rules have been more lucrative for members than those of many other funds.

Concern over DROP comes as the Dallas fund continues to negotiate with city attorneys about an independent audit being pushed by city officials, who are skeptical of the pension fund's accounting. The audit has been delayed because pension officials have refused to turn over documents related to the fund's real estate and private equity ventures.

Council member Atkins, who has been at the center of the negotiations, said Tuesday that details of an agreement over the audit are still being worked out.

"We've got a long way to go," he said.

The Dallas police and fire pension fund has hundreds of millions of dollars invested in real estate and private equity deals, where valuations are more difficult to determine than with stocks and bonds. The Dallas Morning News reported last year that the fund valued many of its real estate ventures by what it had invested in them rather than by appraisals or other methods.

The fund began late last year to update its accounting procedures for valuing those investments, fund administrator Richard Tettamant said Tuesday.

The resulting new appraisals and valuations have resulted in lowering the fund's 2013 investment return from a hoped-for 11 percent to something closer to 8 percent, he said. Final numbers are expected this summer.